The demise of liberal democracy

Cartoon of a sinking ship
Western governments appear to have thrown caution to the wind. Higher taxes are financing massive spending campaigns that have no clear implementation strategy (source: GIS)

Both the Biden administration and the European Union have announced unprecedented spending programs, $1.9 trillion and 1.8 trillion euros respectively, to fight Covid-19 and kickstart the green economy. There is no clear concept on how these funds will be spent or financed. But this kind of spending could serve as a pretext for a sharp tax increase in Washington. It appears that on both sides of the Atlantic, governments see the pandemic and the green economy as ideal excuses to keep overspending and increasing the role of the state and the administration.

This is alarming, given what took place in past societies and states that resorted to overspending and degrading the worth of their currency.

In ancient Rome, during the late years of the empire, internal turmoil had disturbed trade flows and the government had become bloated and inefficient. Rulers had to find ways to appease rising discontent. So they tried to buy off the population with gifts. To find the necessary funds, they increased taxes, implemented aggressive tax controls and began debasing silver coins by adding copper (a method strikingly reminiscent of today’s quantitative easing).

So-called liberal democracies have become crippled by huge debts
With these new measures came a tangle of laws that opened the door to corruption. The people of Rome began demanding panem et circenses as their due. The regime had to feed and entertain the population to survive, to the detriment of a sustainable common good. These welfare handouts from the state created rivalry between different social groups who felt they were disadvantaged compared to others, further poisoning the political situation. As a result, the formidable Roman Empire, once an efficient and well-functioning system, decayed and collapsed. Still, the principle of redistribution by taxing the rich to feed the poor remained popular. But this created the wrong incentives, punishing the hardworking on one side and encouraging idleness on the other.

Likewise, Spain was once the dominating power in Europe. In the 16th century, its European territories included not only the Iberian peninsula, but also large parts of Italy and the Netherlands. Its overseas lands stretched from the southern tip of Tierra del Fuego up to modern-day Colorado and California in the Americas, and also included the Philippines in Asia and territories in Africa. But the Spanish state expanded so much that it required higher taxes, which in turn led to inflation. The defeat of the Armada around the British Isles was not the cause of this decline, but a symptom.

There are several such instances in history, as the disintegration of the Ottoman Empire in the 19th century and the ebb of British power in the late 19th and 20th centuries. And we could soon witness yet another example.

The fall of Western democracy

In the last 20 years, Western democracies have entered a similar phase of decay. So-called liberal democracies have become crippled by huge debts. Tax systems have become byzantine, opaque and contradictory, allowing arbitrary decision-making. Tax collection is increasingly aggressive. The right to personal privacy is undermined under the pretext of tax justice. The productive spheres of the economy decline while the administration and auditing sectors grow.

Under the pretext of political correctness, public debate is being narrowly restricted. Established politicians and NGOs, for the sake of redressing inequalities – some of which are inevitable – have created new forms of discrimination. It has become customary to ban words, rename streets, remove monuments, curb traditions and marginalize the role of the family, all for fear of offending. This results in heightened polarization, making citizens more vulnerable to propaganda and manipulation.

Lately, the spending spree to fight Covid-19 and climate change has gone into overdrive
More and more financial information on private persons is being exchanged between authorities under the pretext of tax collection and the fight against money laundering and terrorism. Sensitive data is shared with highly corrupt countries, including some that sponsor terrorism. It is necessary to fight financial crimes, but it is highly doubtful that cooperating with untrustworthy and subversive countries will serve this purpose.

The best way to fight fraud would be to drastically simplify tax systems and limit the size of public administration. But there will always be those who answer that this is not realistic. 

Accepting the end?

Lately, the spending spree to fight Covid-19 and climate change has gone into overdrive. All limitations on spending were removed. Quantitative easing, i.e. money printing, has reached unprecedented levels – much like when Romans mixed copper with silver to keep the people happy. And like in ancient Rome and other empires, the liabilities resulting from this strategy will burden future generations.

Fighting Covid-19 and environmental damage are worthy causes. But there is no transparent plan to use the money that is now earmarked for these purposes. The only certainty is that the influence of the state and the size of the administration will grow. The quest for sustainability needs to include not only ecological concerns, but also economic and social ones.

The United States is in a situation similar to that of Europe. In order to allow additional spending, Washington is now sharply raising taxes and, like European countries, has joined the OECD’s campaign for minimum tax rates worldwide. This would allow the creation of a global cartel that could impose excessive taxation at will. Within the G20, democratic countries are in agreement with authoritarian ones on this matter. Like in the Roman empire, the wrong incentives are applied and taxes are being used as a way to pursue equality. The real winner here is the privileged bureaucracy.

The control that parliaments exert over budgetary matters is being eroded even in liberal democracies. Most MPs are dependent on the state for employment, and loyally follow their party leaders who sit in government – a vicious circle.

Looking at history and the present fiasco, we can conclude that real democracies are in danger. They are threatened not by the so-called populist movements, but rather by overspending and the disproportionate power given to administrations.

In a functioning state, taxes are never used as a political tool
This all results in a switch from a decentralized democracy to a centralized technocratic bureaucracy. The benefits of digitization will be overshadowed by its misuse as a tool to control citizens.

Liberal democracy is legitimized by individual freedom. And now the only way to restore it would be to radically reduce the size of the administration, simplify systems and return to a reasonable, pragmatic and equitable taxation by focusing on common sense and the long-term public good. In a functioning state, taxes are meant to cover the necessary expenses of the administration and are never used as a political tool.

If we believe that reducing the size of public administration – and therefore expenses – is impossible, then we also implicitly accept the end of true liberal democracies based on freedom and the rule of law.

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